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10 Jun 2024

Directors and Officers Liability Insurance

10 Jun 2024
Directors and Officers Liability Insurance

Directors and Officers (“D&O”) play a crucial role in running a company, making important decisions and bearing responsibilities towards various stakeholders. However, they are also susceptible to risks and personal liability for losses or harm suffered by the company arising out of the company’s acts during the course of their management. As a result, protecting such D&Os  from unnecessary claims is crucial.

References to D&O liability insurance (“D&O Insurance”) have been made under sections 197(13) and 149(8) read with Schedule IV of the Companies Act, 2013 (“Act”). However, obtaining a D&O Insurance has not been made mandatory under the Act.

Section 166 of the Act outlines the fiduciary duties of directors, including but not limited to (a) exercising due and reasonable care, skill, and diligence; and (b) not attempting to gain any undue gain or advantage. Failure of the D&Os to follow these duties could lead to several liabilities arising upon the company. The D&Os can also be held liable under other statutes, such as the Income Tax Act, 1961 (“IT Act”), the Goods and Services Tax Act, 2017 and other environmental and consumer protection laws.

The said D&O Insurance indemnifies D&Os against liabilities, except for those arising out of or in relation to fraud, wilful misconduct, bribery, insider trading, etc. Premiums paid by the company to the insurer shall not be considered to be a part of the D&Os’ remuneration, but if such D&Os are proven guilty of acting in contravention of the provisions of the Companies Act, 2013, it shall be considered to be  a part of their remuneration.

Under the IT Act, D&Os can be prosecuted with fines and imprisonment for (a) failure to deduct TDS(b) willful tax evasion; and (c) making false statements. The IT Act also imposes joint and several liabilities on every director of a private company for the recovery of tax dues.As per the provisions of the IT Act, directors who have either resigned or joined during the relevant previous year would be covered under the purview of the same.

Some of the specific exposures that make D&O Insurance necessary are:

  • Vulnerability to shareholder/stakeholder claims
  • Employment practice violations
  • Regulatory investigations
  • Accounting irregularities
  • Exposures relating to mergers and acquisitions
  • Corporate Governance requirements
  • Compliance with various legal statutes

Protecting D&Os through D&O Insurance is essential in today’s corporate environment, as companies and directors face increased risks and exposure to liability.

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Disclaimer – The content of this document is for information purpose only and does not constitute advice or a legal opinion. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting on the basis of this write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Treelife is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.

Posted by
Treelife
Last updated on
Jun 10, 2024, 2:00pm

Disclaimer:

The content of this article is for information purpose only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Author / Treelife is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.

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